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The Case of Tobacco Marketing in Malawi

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The Case of Tobacco Marketing in Malawi A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Zant, Wouter Working Paper How does Market Access for Smallholders affect Export Supply? The Case of Tobacco Marketing in Malawi Tinbergen Institute Discussion Paper, No. 16-054/V Provided in Cooperation with: Tinbergen Institute, Amsterdam and Rotterdam Suggested Citation: Zant, Wouter (2016) : How does Market Access for Smallholders affect Export Supply? The Case of Tobacco Marketing in Malawi, Tinbergen Institute Discussion Paper, No. 16-054/V, Tinbergen Institute, Amsterdam and Rotterdam This Version is available at: http://hdl.handle.net/10419/145361 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu TI 2016-054/V Tinbergen Institute Discussion Paper How does Market Access for Smallholders affect Export Supply? The Case of Tobacco Marketing in Malawi Wouter Zant Faculty of Economics and Business Administration, VU University Amsterdam, and Tinbergen Institute, the Netherlands. Tinbergen Institute is the graduate school and research institute in economics of Erasmus University Rotterdam, the University of Amsterdam and VU University Amsterdam. More TI discussion papers can be downloaded at http://www.tinbergen.nl Tinbergen Institute has two locations: Tinbergen Institute Amsterdam Gustav Mahlerplein 117 1082 MS Amsterdam The Netherlands Tel.: +31(0)20 525 1600 Tinbergen Institute Rotterdam Burg. Oudlaan 50 3062 PA Rotterdam The Netherlands Tel.: +31(0)10 408 8900 Fax: +31(0)10 408 9031 How does Market Access for Smallholders affect Export Supply? The Case of Tobacco Marketing in Malawi by Wouter Zant* Abstract Transaction costs play a key role in the behaviour of smallholders in developing countries. We investigate smallholder tobacco cultivation in Malawi, Malawi’s major export crop, and exploit the introduction of an additional tobacco auction floor to measure the impact of a reduction in transaction costs on smallholders’ decisions on tobacco crop area and production. Estimations are based on annual data by Extension Planning Area, from the Ministry of Agriculture and Food Security, combined with data from other sources. A 10% reduction in transport cost is shown to lead to an increase in crop area and production of around 4% and 2.5%, respectively. Supply response runs along the extensive margin: both area and production increase, but production slightly less, leading to a decrease in yield, most likely because tobacco cultivation expands to less suitable areas and/or less productive farmers. In view of the non-experimental nature of the data, we confirm impacts by estimating a dose response function using generalised propensity scores. Supply response increases substantially within a distance to auction floor of less than 60km. We find no empirical support for conversion of crop area from maize and other crops into tobacco. JEL code: D23, O13, O55, Q11, Q13 Key words: transaction costs, market access, subsistence, food & cash crops, Malawi, Africa * Wouter Zant is affiliated with the VU University Amsterdam and a research fellow of the Tinbergen Institute, the Netherlands; mailing address: Wouter Zant, Vrije Universiteit, De Boelelaan 1105, room 10A-79, 1081 HV Amsterdam, The Netherlands; e-mail address: [email protected]; tel: +31 20 598 9592; fax: +31 20 598 9870. Introduction Smallholders in developing countries can choose to produce food crops for home consumption or cash crops for the market1. High production costs, high transaction costs, and high risks of output and input prices often make subsistence farming – food production for home consumption – the optimal choice (see e.g. De Janvry et al. 1991; Jayne, 1994; Fafchamps, 1999; Key et al., 2000; De Janvry and Sadoulet, 2006)2. Widespread subsistence farming leads to low productivity and low growth in agriculture. And since developing countries have large agricultural sectors with a comparative advantage vis-à-vis non- agricultural sectors, large multiplier effects from agriculture to the remaining sectors of the economy and few alternative growth strategies (de Janvry and Sadoulet, 2010), a stagnant agricultural sector is likely to obstruct the economic growth potential of these countries. The question arises how can countries overcome this subsistence trap? A possible way out of this trap is to reduce transaction costs for smallholders. Transaction costs – costs incurred in order to sell on the market – include costs of information, collection, loading and transport of goods, bargaining on prices and conditions, monitoring and insurance, with transport costs usually considered the largest component. It is often claimed that transaction costs, which are only partly observed, are large and constitute a major cause of not selling on the market (De Janvry and Sadoulet, 2006). Conversely, improved access to markets – both the mere existence of markets, and also the logistical and marketing infrastructure – decrease transactions costs and should, thereby, trigger smallholders to cultivate crops for the market. Transaction costs, hence, play an important role in explaining the cash crop – food crop decision. 1 Food crops may also be sold on the market and, hence, are not necessarily or exclusively used for subsistence. 2 Promotion of either food crops or commercial crops is also at the heart of policy discussions on economic growth and development (see e.g. Harrigan, 2003, 2008). 1 The current paper aims to contribute to this literature by investigating tobacco production in Malawi. In particular we study the impact of improved market access – caused by the introduction of a new auction floor – on the household decision to grow tobacco. Tobacco in Malawi is by far the most important cash crop and export crop, grown in nearly all Malawi districts and, by regulation, exclusively sold on auctions floors. Moreover, since virtually all production is exported, tobacco is also a key determinant of foreign exchange earnings and government revenues. In 2004 an additional auction floor started operations in Chinkhoma, Kasungu district, on top of the three already existing and operational auction floors (respectively in Limbe (Blantyre), Kanengo (Lilongwe) and Mzuzu (Mzimba). Due to a reduction in transport costs the new auction floor offered farmers in its neighbourhood an opportunity to produce tobacco in a commercially viable way. We exploit the introduction of this new auction floor to quantify the impact of a reduction in transport costs on tobacco area productivity (the intensive margin) and tobacco crop area (the extensive margin). Transaction costs in Malawi tobacco are substantial: estimates (2000/01) are in the range of 14.5% to 22.5% of sales value (see FAO, 2003). Survey based estimates of transport costs are slightly lower (see Section 2). For the empirical measurement of impact we make use of aggregate annual area and production data of smallholders at Extension Planning Area level (EPA), for a period of seven years, from crop seasons 2003/04 to 2009/10, 198 EPAs in total, covering the whole of Malawi. The paper is organised as follows. In Section 1 we position this study in the literature and highlight its contribution. In Section 2 we describe the Malawi tobacco industry: the importance of tobacco for the Malawi economy, the transition from estate based to smallholder based tobacco production over the past decades and the marketing institutions in the tobacco commodity chain. In Section 3 we show how we measure the impact of improved market access for tobacco smallholders in Malawi. In Section 4 we present and discuss the 2 estimation results. In Section 5 we consider alternative explanations and potential threats to estimated results and run robustness checks. In Section 6 is summarizes and concludes. 1. What does the literature tell? What causes farmers to grow low yielding food crops for home consumption rather than high return cash crops for the market? And what explains that large groups of farmers prefer not to participate in the market? Various researchers have modelled the decision to grow either subsistence crops or cash crops, and the decision to participate in the market (De Janvry et al.,1991; Goetz, 1992; Jayne, 1994; Omamo, 1998; Key et al., 2000; Renkow et al., 2004; de Janvry and Sadoulet, 2006). Due to transactions costs households have a tendency to get trapped into self-sufficiency and limited participation in the market explains a sluggish supply response (De Janvry et al.,1991).
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